Applying the rule of debit and credit- Example-6

Example-6.   Goods worth £500 returned to Jammy Traders as it was faulty.

Step 1- Identify the two accounts involved in this transaction

1.   Asset Account (Goods are assets)

2.  Liabilities Account (here the liability account is Jammy Traders).

      We know that;

      When goods are purchased we debit “Purchases Account”

      So when purchased goods are returned we have to credit “Purchases Returns Account”

      Purchases returns also known as” Return Outwards”

Step 2- Understand the nature of the impact of the transaction on the two accounts [asset (goods) and liability (Jammy Traders)]

     Returning of purchased goods decrease the asset by £500  

           

     Liability of business is decreased by £500 as we returned the purchased goods

Step 3- Decide which account is to be debited and which is to be credited.

            We know that;

When asset account decreases it is to be Credited and,

When liability account (Jammy Traders) decreases it is to be debited

So, entry is:

Debit Jammy Traders Account with £500

Credit Purchases Returns Account with £500